Europe and UK hold rates steady

The European Central Bank has held its key interest rates steady, just hours before German Chancellor Angela Merkel was to host talks with other top officials on threats to the financial global system.

The ECB's policy-setting governing council, meeting in Berlin, voted on Thursday to leave the rate for its main refinancing operations unchanged at 1.5 per cent at the bank's regular monthly meeting, the last to be chaired by Frenchman Jean-Claude Trichet.

Earlier, the Bank of England similarly held its interest rates at a record low, but decided to pump out another STG75 billion ($A120 billion) of stimulus under its quantitative easing policy.

Trichet was scheduled to explain the reasoning behind the decision at a news conference later.

While the markets appeared to be pricing in a cut in interest rates to help prevent the eurozone from lurching ever deeper into turmoil, analysts had been divided over whether the guardian of the euro would actually make such a move at this stage.

The euro eased slightly against the dollar in reaction to the announcement, slipping to $US1.3280 from $US1.33 previously and stock markets also erased some of the strong gains seen earlier in the day.

Nevertheless, the bank was expected to announce a 12-month refinancing operation to support bank sector funding as well as relaunching the covered bond purchase program.

Trichet, who retires at the end of October after eight years at the helm, could not be leaving at a more difficult time for both the ECB and the euro.

In the 68-year-old Frenchman's own words, Europe is facing its "deepest financial crisis since World War II".

Until as recently as just over a month ago, the situation could not have been more different - after already raising borrowing costs twice this year to keep inflation in check, ECB interest rates looked set to remain on an upward trajectory.

However, concerns that the snowballing debt crisis could crash economic growth forced the bank to call a halt to the cycle of monetary tightening and the ECB's decision-making governing council held key rates steady at 1.50 per cent at last month's meeting.

The situation has since deteriorated so dramatically that a poll of leading economists by the business daily Handelsblatt showed the majority in favour of an immediate cut in rates to avert outright recession.

Because the ECB traditionally likes to prepare the market for any moves in interest rates very carefully in advance, the majority of ECB watchers were convinced it would be too early to expect a rate cut as early as Thursday.

But Trichet was expected to prepare the ground for a move later in the year.

Later on Thursday, Merkel was scheduled to meet with Christine Lagarde, head of the International Monetary Fund as well as the heads of the World Bank, OECD and G20 representatives in the German capital for talks on the eurozone debt crisis.

Jennifer McKeown, senior economist at Capital Economics, suggested Trichet would use his last press conference to hint at forthcoming rate cuts "and pledge extra support for the region's banks".

Trichet, who is to be replaced by Italy's Mario Draghi next month, "will probably acknowledge that the economic outlook has weakened further. With inflation at three per cent, the bank might wait a couple of months before cutting rates", McKeown said.

Nevertheless, the ECB "seems likely to increase its support for struggling commercial banks by offering more long-term funding, perhaps at a 12-month maturity", the analyst continued.

Julian Callow at Barclays Capital Research said: "Overall, we still expect the ECB to ease policy given the impending recession risks in the euro area, but we must reckon with that adjustment coming later rather than being more pre-emptive."